Treasuries Deliver $700 Billion Windfall to World Safety Seekers

Can Yields Go Much Lower?
  • U.S. 10-year yields fall for fourth day to close at record low
  • Fed minutes show heightened uncertainty after payrolls slump

The 2016 bond-market rally that drove Treasury yields to record lows this week has generated more than half a trillion dollars in gains for global investors.

Treasuries have earned $737 billion this year, according to Bank of America Merrill Lynch index data, as signals that policy makers may add to stimulus encourage investors to pad returns by buying longer-dated debt. The Bank of Japan and European Central Bank are experimenting with negative interest rates as traders speculate the Federal Reserve will be unable to lift rates for years.

Concern that the U.K.’s June 23 vote to leave the European Union will weigh on the global economy renewed a haven bid already driven by questions over China’s slowdown and the strength of the U.S. recovery. U.S. 10- and 30-year debt rose for a fourth trading session, with yields falling to all-time lows. Japanese 20-year bond yields briefly slid below zero, deepening a pool of almost $10 trillion of securities in the Bloomberg Global Developed Sovereign Bond Index with negative yields.

“Yields have fallen while duration has increased, creating outsized returns or losses when rates move sharply,” said Aaron Kohli, a fixed-income strategist in New York at BMO Capital Markets, one of 23 primary dealers that trade with Fed.

Declining Yields

The yield on the 10-year Treasury note fell one basis point, or 0.01 percentage point, to 1.37 percent as of 5 p.m. in New York, the lowest closing level on record. The price of the 1.625 percent security due in May 2026 was 102 11/32.

The 20-year Japanese bond yield fell as low as minus 0.005 percent, according to Japan Bond Trading Co. The 10-year note yielded minus 0.275 percent after dropping to a record minus 0.285 percent. The pressure is building for Japan’s central bank to add to stimulus, as an accelerating surge in the yen threatens to wipe out the effects of more than three years of monetary easing.

In the U.S., fed fund futures signal only about a 12 percent chance of higher interest rates this year, as policy makers weigh signs of U.S. economic improvement against global risks. 

The minutes from the Federal Open Market Committee’s June meeting released Wednesday indicated that uncertainty about the U.S. labor market and financial stability contributed to policy makers’ decision to leave interest rates unchanged, after government data showed U.S. employers added the fewest workers in almost six years in May. Officials also expressed caution ahead of the U.K. referendum on whether to leave the EU.

Economic Data

The U.S. added 180,000 jobs last month, according to the median forecast before the release of the Labor Department’s June nonfarm payrolls update on July 8.

“With Brexit spillovers keeping markets nervous, we believe the risks around nonfarm payrolls are asymmetric,” Bank of America Merrill Lynch strategists including Athanasios Vamvakidis wrote in a research report Wednesday. “Jittery markets mean a miss would impact sentiment sharply.”

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